Paul Krugman dismisses fears of rising interest rates leading to a government debt crisis on the grounds that the Fed could just buy up the debt to keep rates low. He blogs:
What everyone stresses is that U.S. government debt, until now regarded as the ultimate safe asset, suddenly becomes not so safe. That could drive up short-term interest rates, at least a bit, because T-bills could start to trade at a discount relative to cash. Although maybe not. Is there a reason the Fed can’t serve as bond buyer of last resort, standing ready to buy T-bills at par, so they remain fully liquid?
Meanwhile, what about long-term interest rates? A lot of people seem to assume that they’ll go up, because who’ll buy debt that might face delays in payment? But see above.
So, Krugman asks, is there a reason the Fed couldn’t just print money out of thin air to buy up all the government debt?
Boy, that sure is a toughy.
Gosh. Can you think of one?
Hmm…. Having a hard time getting a handle on this one.
Nope. I got nothing. Man, Krugman sure does have us stumped, doesn’t he?